Nexen-China deal not without risk, conference told

The federal government's new rules around foreign investment by state-owned enterprises (SOEs) could potentially result in less investment in the Alberta oilsands and that could make it more expensive to operate those projects, the province's energy minister has warned.

"The impact of that is that it will simply increase the cost of capital, that it will add on one more slice of cost of production in this province," Ken Hughes told a conference in Calgary Monday. "We already have challenges of operating business in Alberta."

Alberta is a high-cost place to do business because of the competition between the private sector, and the oil and gas sector in particular, and all other sectors, he told the conference, Canada in the Pacific Century, hosted by the Canadian Council of Chief Executives and The School of Public Policy at the University of Calgary.

Last week, Prime Minister Stephen Harper approved a $15.1-billion bid by CNOOC Ltd. for Nexen Inc. and a $5.3-billion takeover of Progress Energy Resources Corp. but said foreign state control of oilsands development has reached the point at which any further foreign state control would not be of net benefit to Canada (DOB, Dec. 10, 2012).

"Friday's announcement was an important inflection point in the history of this country and the oilsands that we should not underestimate how it will affect future investment in this province," said Hughes.

The federal government had an extremely difficult decision to make but it balances Canadians' interests "not badly," he said.

"The last thing the energy industry and Alberta need is for Canadians to feel really uncomfortable about any foreign investment so you have to modulate foreign investment and where it comes from and that's not a bad objective from a foreign-policy point of view and from a social licence perspective."

Alberta has always turned to foreign investment of one kind or another because it has never had enough capital or human resources to develop its own energy resources in this province, said Hughes, adding for the longest time most of that support came from the United States.

Last year the oilsands alone attracted more than $22 billion in investments and the Alberta government does not expect that to slow down, he said.

The government also fully expects there will continue to be campaigns against oilsands and pipelines and the way to address that is to perform well, to tell people what the industry is doing to perform well and to continue to fund innovation in the province, said the minister.

Michal Moore, professor at the School of Public Policy at the University of Calgary, told the conference one does not have to read very far between the lines of the federal government's new policy to see that it could have tentacles reaching out to other areas such as manufacturing and to other provinces.

He asked the energy minister about the extent the Alberta government participated in the federal government's decision. Hughes responded that while the province had been "appropriately engaged" more engagement would have been welcome.

With its takeover of Nexen, CNOOC will hold 100 per cent of the Long Lake in situ oilsands project and 7.23 per cent of the Syncrude Canada Ltd. oilsands consortium.

Gil McGowan, president of the Alberta Federation of Labour (AFL), asked if the Alberta government had considered the possibility that on the subject of oil prices the interests of CNOOC and the Chinese government run counter to Alberta's and particularly to that of the AFL.

Nexen is not only an oil producer but a marketer of 300,000 bbls of oil per day as well and possibly a shareholder in the proposed Gateway pipeline, he said.

"Our concern is that through CNOOC, Sinopec and other investments that the Chinese are pursuing their national interests by controlling the development, the pipelines and the marketing and if they control the marketing, will they be marketing for our interests or theirs, and their interest is low price, not high price," said McGowan.

Hughes said that even if Alberta were to get world prices for all its products it wouldn't be "all sweetness and light from there on in" because it will be subject to the usual vagaries of the commodities market.

Also, even with China's might and breadth and depth it can't get to the point where it can control the world market; there will always be transparent markers in the market place to indicate what the market really is, said the energy minister.

"Transparency as a result of market forces is the force that balances out any one player trying to corner the market," said Hughes, adding China's now roughly 10 per cent interest in oilsands production is "far from a dominant position."

He noted that Nexen does market on behalf of the Alberta government in a process the government opened to competition. "We're ensuring that we have access to transparent market signals."

Hal Kvisle, president and chief executive officer of Talisman Energy Inc., said Friday's announcement by the federal government provided clarity to the industry and bodes well for the future of its structure. It clearly sets the stage for joint ventures with Canadian companies thus providing an opportunity for state-owned enterprises to participate in oilsands and natural gas projects with Canadians operating them, said Kvisle.

Indicating a slide with Peters & Co. statistics saying Canada owns 59 per cent of the oilpatch leaving 41 per cent foreign-owned, Kvisle said that's a remarkable reversal in the numbers since he began his career in the 1970s.

Canada can work very well with foreign companies, he said, noting Talisman's joint venture this year with China's Sinopec International Petroleum Exploration and Production Corporation.

Talisman entered into a US$1.5 billion joint venture with Sinopec, which bought 49 per cent of the shares of Talisman's U.K. North Sea business (DOB, July 23, 2012).

Paul Evans, professor at the Institute of Asian Research and Liu Institute for Global Issues at the University of British Columbia, said in some ways Harper's decision was not just a decision about a particular commercial transaction nor even the oilsands.

"This is a broader marker in where Canada is going in the Pacific century and how we're going to come to terms with business organizations, governments [and] rules of the game that vary from what we have been accustomed to in Canada in the era of Western domination," said Evans.

On a domestic political level, Harper's decision was tactical brilliance but showed "severe ambiguity" for Canada's future as a global player in the oil industry and how the country will deal with state-owned enterprises and forms of capitalism that are "basically playing our game but not quite by our rules," said Evans, adding, "This is in some ways the most important decision made on the Pacific century by the Harper government."

While he acknowledged there is a threat from state-owned enterprises, it's very manageable, he said. "China has all of the capability, very few of the rules and all of the strategic interests in various areas that are important to Canadians, from telecommunications to energy."

Ray Boisvert, president of I-Sec Integrated Strategies, a firm specializing in risk mitigation and the use of advanced analytics to combat cyber and other emerging threats, said he is comfortable with investment from China because it is needed.

Much of Canada's success as a world-class leader in the energy sector is due to its know-how -- its intellectual property - and that has to be protected, said Boisvert, former assistant director of intelligence at the Canadian Security Intelligence Service where he was responsible for the directorate that sets intelligence collection priorities as well as the service's foreign relations and academic outreach programs. He also led CSIS's counter terrorism program

"When we engage with others, especially those who don't play by rules we're used to, there could be consequences so we have to be mindful of that," he said.

Boisvert said Canada needs to be on the lookout for corruption and to verify its supply chain as it gets more engaged with China and other SOEs. "We must move forward with eyes wide open and that means being smart that others will eat your lunch," he said.

He cautioned that SOEs may want to gain access to not just resource plays but also technologies and warned producers to manage their information, communications, databases, engineering reports and sales teams.

"I can tell you honestly that a lot of countries are taking advantage of those systems, those communications, to get insights on deals," he said.

Also on the panel was John Zahary, president and chief executive officer of Sunshine Oilsands Ltd., whose shares are traded on the Hong Kong Stock Exchange as well as the Toronto Stock Exchange.

Nearly half of Sunshine's shares are owned by Asian investors.

Zahary was asked if he has any concerns that -- while Harper is being praised for his balanced decision, until the details of what constitutes a "net benefit" has been determined or what the "exceptional circumstances" are that would allow some deals to go ahead -- that decision sends a message to Beijing that the brakes have been applied to investments in Canada.

Zahary said it may be in Canada's best interest that net benefits are not precise, that it is appropriate the federal government has some discretion and generally the rules are well understood. What's important are employment, capital and transparency, he said.